Equity and Debt Investments Are Naturally Adversarial
Whereas Revenue Royalties Are Collaborative
Investments in the equity of companies are based on the principle of profit sharing between those physically working in the company and those who have passively bought a percentage of the ownership of the company. The basic concept is that the greater the profitability of the company the greater its future value will be. For practical purposes, value is measured as the net amount for which the company can be sold.
From the perspective of equity owners, management is expected to produce increased revenues with a minimum of expenses. Staff and executive compensation, health and retirement plan and all expenses other than raw material cost of goods are seen by equity holders, especially those not directly involved in the operations of the company, as being profit reductions. Therefore, there can be an adversarial relationship of self-interests between company management and investors.
Those who loan money to companies are primarily concerned with the assuredness of repayment and the level of interest paid on the debt. Lenders are not interested in the growth of the company’s revenues or profits. The lenders’ primary concern is that the company will be as risk free as possible. Growth and innovation result in change, and change may be perceived as threatening by lenders.
Revenue royalties, a percentage of sales paid for the use of capital, reduces profit margins while allowing for the company to increase revenues and therefore total profitability. Both the equity owners and the royalty investors seek and benefit from increased revenues. The relationship is fully collaborative, as both parties want the same results.
Royalties can have negotiated terms which meet the needs of both the companies selling a percentage of their defined revenues and of investors, as to royalty rates, payment period maturity, premature terminations, delinquency remedies, and superior performance bonuses.
We can professionally advise client royally issuing companies and royalty investors. Business founders who truly believe that significant value will result from their efforts should be concerned about the percentage of ownership they will be able to retain after completing the necessary financing for the development of their company. Royalties are neither activity restricting debt nor equity diluting. With revenue royalties we can create financing solutions for client companies able to realistically project annual revenues, which we believe will not be equity-dilutive and be found attractive by professional investors.
Arthur Lipper, Chairman
arthurlipper@gmail.com
British Far East Holdings Ltd.
current writings at http://www.arthurlipper.com